Applying for business loans can be complicated. There is no standard credit scoring model in existence yet that is commonly accepted by banks, finance companies, and other lending entities. Each one of these entities uses a different scoring model and set of information sources to determine creditworthiness.
If you plan to apply for a business loan, you need to make sure that you make a good case in the different areas looked at by different lenders as they prepare to lend.
Your Creditworthiness
Lenders, in order to be willing to lend, need to see applicants as financially reliable. If you’re applying, they look at your personal credit report and the business credit report of your company. These are their primary tools of assessment. More and more, these days, lenders also ask for trade references.
The Credit Capacity of Your Business
It’s important, to any lender, to be able to judge the ability of your business to pay back a loan. It’s called credit capacity. To judge a business on its ability to repay, lenders look at its cash sources, its repayment history, cash flow, and its history with the banks. Businesses need to start early to ensure that there is time to build a good credit history. Taking out small business loans on a regular basis is one of the primary ways in which to create a good credit history, one that can be put to good use when a larger loan is required.
The Capital That You Have Invested in Your Company
When you make a large capital investment in your business, it works in your favor at the time that you apply for a loan. It impresses lenders’ representatives when they look at your file. When you’re deeply invested in your business, it becomes clear to them that you have a stake in the success of your company. Investing in your business can, then, help immensely.
How Much Collateral You Bring
It’s possible to put up personal property as collateral. In general, however, business lenders accept commercial real estate, machinery, inventory and other high-value items as security against which to issue funds. These are assets that they can go to in the event that a loan is not repaid. Once a lender accepts an asset as collateral, they find out what kind of loan-to-value ratio it makes, and use their internal model to calculate the loan they can issue. Finding high-value collateral to pledge can help a loan application.
Company Outlook
Many businesses don’t realize it, but to lenders, a business applying for a loan needs to have a reasonable outlook for its future. You need to prove that your industry is capable of growing, that your company is in a competitive position, and that you have experience in the business, that helps you leverage your position in the market.
There’s one more aspect to an application, one that isn’t as well-defined as the items above: you need to be a known entity to the lender. A bank that has dealt with your business for years would be in a position to know about your dependability. Personal knowledge of loan applicants is often the final clincher. Starting steady banking relationships as early as possible is important.
When you prepare well in each of these areas, lenders should find it hard to refuse you a loan.
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